Welcome to Zirra’s full guide to private company analysis. As we at Zirra evaluate dozens of companies each and every day, we decided to share with you some parts of our model that can help you analyze companies like a pro. Of course, remember that analysis is a personal process - it is always biased and never accurate. No two different valuation processes will yield the same result and, as Prof. Aswath Damodaran says, “You can never be right in your valuations, but you must be the least wrong.” And yes, Damodaran is the same bold NYU professor that valued Uber at $28B after the company had already been valued at $62B in their recent financial round.
There are two common themes that are the heart of the difficulty in analysis and valuation. First, and broadly speaking, the private tech industry is one of the most secretive and mysterious - in spite of the fact that it is affluent and growing rapidly. It is a sort of big black box for most of us, but not only for us. Those who are employed in the startup ecosystem, entrepreneurs, venture capitalists, reporters, lawyers, and accountants, are all suffering from serious disinformation regarding the reality that surrounds them.
A second common issue is that the valuation of a private company is a taboo and is rarely spoken about. But it is not just that it is a sensitive subject, there is also rarely a consensus about a startup’s valuation when the company is not in the middle of a funding round. Investors, founders, lawyers and accountants have a hard time agreeing on a single valuation, which is generally being pushed up or down according to each side. The result of this panoply of secrets, taboos, and mysteries is enormous disinformation surrounding the startup market.
However, if you would like to invest wisely as a VC investor, or to understand your competitors as an entrepreneur, or to produce better reporting as a journalist or an analyst, you cannot afford to simply puzzle about valuations. Here at Zirra we decided to do something about that by making it our mission to bring transparency to the private tech market. We created a valuation process that comes as close as possible to the company’s true valuation using our metrics. We combine intrinsic valuation with relative valuation, and we neutralize external noise such as the inflation created by preferred stocks or bubble effects.
Therefore, we would like to share with you some of the principles that we set for ourselves in the valuation process that will help you analyze companies like a pro for purposes such as company screenings, due diligence, or creating a partnership. In addition to these tips, you can always go to Zirra.com to get full company analysis delivered to your inbox within two days.
1. Designate the Purpose of Your Analysis: First you should figure out what is the purpose of your research. The answer to that will influence the approach and method of your analysis. For instance, if your analysis should serve as a due diligence process before making an investment you should focus more on intrinsic parameters such as DCF or growth. However, if you’re a job seeker who wants to become more familiar with the company from that perspective, you should be focused on HR parameters such as the quality of the team or growth in employees.
2. Identify your primary motives: Behind every valuation process hides a motive. Either it is unearthing a deep truth, finding out about profitability, extending your deal flow, or screening out and mapping the field for future competition. Once you pinpoint your motives, the analysis process becomes better suited to your needs.
3. Consult with an expert: Before you embark on the valuation journey, consult for a few minutes with an expert you know and trust. They will be able to give you insights you had not even thought about and raise further questions that you should ask in the analysis and valuation process. We at Zirra are managing a network of top-notch experts from several technological fields such as artificial intelligence, robotics, enterprise software, video, content, healthcare and semiconductors. They help us get a fresh perspective on startup companies and their markets, as well as inspiring ideas that would not have arisen if we were to analyze merely by the book. We also found a refreshing way to get the best attention from our experts by offering to directly give their compensation to the charity of their choice, something many of them have chosen. We are always growing our network of experts so if you’re an expert in tech, finance or VC investment, please contact us.
4. Collect good data: Analysis is an insightful presentation of the data, so make sure that you can tell the difference between data, facts, insights and opinions. Therefore, the first step is to know the best sources. Zirra, for instance, uses databases such as SEC, Bloomberg, SimilarWeb, Adwords or the company’s website to get the data, and sites like Glassdoor, iTunes or Google Play to get opinions or reviews. You can also use databases such as Pitchbook, Crunchbase Pro, Mattermark, Datafox and Privco to get the basic information on companies.
At Zirra we use our own proprietary technology that we developed in order to extract all of this data, using 85 different sources in total, into a model that contains a variety of useful insights. This is based on an AI and machine learning technology that creates correlations between successful companies and can learn to categorize and connect data points to growth, revenue, profit and success. The model provides such insights on startup companies as estimated valuations, competitor lists, estimated time to exit, risk and success factors, as well as ratings for the team, product, momentum and execution. Zirra is able to create our Spotlight Reports based on this data, which is then personally analyzed, in order to help investors and entrepreneurs learn more about companies they are engaging or competing with.
5. Map the Market: Mapping the market is crucial to understanding the competition around the company and we further recommend distinguishing between an indirect competitor and a direct competitor. An indirect competitor is a company that offers an alternative service that attracts users or customers away. A direct competitor is a service that offers basically a similar product. For instance, an indirect competitor to Airbnb is Holiday Inn, whereas a direct competitor is the Chinese company Xiaozhu.com, who have just raised $65 million to offer a Chinese clone of their service. Another example is Forter, a fraud detection and risk management platform for online merchants that helps increase the number of transactions authorized. Paypal can be considered as an indirect competitor, as well as Signifyd and Kount Complete. In addition, there are at least two more companies that develop platforms similar to Forter and are, thus direct competitors: Riskified and EverCompliant. And we all hear every now and then about companies who make such claims as their only competition being Google, or that they are so unique as to not even have any competition. These claims are generally not true because either they are trying to hide the real competition or they are just not aware of it. Don’t take the list of competitors presented by the company at face value as it will likely be biased or skewed.
6. Assess the current business situation: Use as many sources in the public domain as possible to simply assess parameters which can reveal specific things about a company.
a. Use Linkedin Premium in order to extract the total growth in employee count over the last two years, the average tenure of employees, and the employee distribution by function. In addition, this data can tell you if the company is growing or shrinking, if the staff turnover level is high or low, and what is the ratio between departments, such as engineering and marketing, in the company. Linkedin can also tell you, for free, an estimate of the total number of employees and their respective locations.
b. Use SimilarWeb to monitor the traffic that flows into the company's website, discover new competitors, and create a comparison graph showing how their traffic and bounce rates stack up. SimilarWeb also allows you to see the most common referrals to the company’s website, as well as the Google Searches that brought the majority of users.
c. There is also AppAnnie to monitor the popularity of mobile apps in different countries, and you can complete this with users’ reviews and download stats on iTunes and Google Play.
d. Use Google Trends to compare the popularity of companies as searched keywords
e. Read employees testimonials on Glassdoor, where you can obtain a general impression about the leadership in the company and learn about their compensation packages and lay-offs.
f. And you can match pricing plans on the company’s website with estimations of revenues that are sometimes published in the press to see if those numbers make sense. Use press releases prudently, as the information that is being published is, in most cases, controlled by the company, not to say supplied by it.
Google Trends : Comparing Snapchat, WhatsApp and Instagram
Didi Chuxing Total Employee Count
Gett Employee Distribution by Function
7. Scrutinize Risks: after collecting data and opinions it’s time to get to work and create some insights. A list of risk points is a necessity for any balanced company analysis. Risks points should highlight the hurdles the company must recognize and overcome in order to succeed. At Zirra, we have identified 168 types of risks points we know to tag automatically, from bad branding, bad product reviews and fierce competition, to a founder's lack of experience and allegations of their illegal behavior. Our machine learning technology now helps us automatically flag risk points after collecting enough data from dozens of sources. Observe how we flagged risk points for the dog sitting app Rover.com, where we flagged for privacy issues. We claimed that Rover.com requires personal information that the user may not be willing to or unknowingly will share, leading to potential privacy infringement issues.
8. Flag Opportunities: It is also very important to list success factors. We currently have listed 51 opportunity points that should help a startup to grow, from a hot market and increasing traffic, to star investors, or having a serial and experienced entrepreneur on board. As an investor, for instance, you’d like to find the companies with the best success factors, and to do so before everyone else. We recommend to look at momentum of several markets and sub-markets. For example, the Chinese ride-hailing service Didi Chuxing received the following success points: “It has been able to conquer a strong leading position in their market”, “It has shown a rise in important growth indicators, including a significant surge in services and revenues”, and “it has forged strong partnership with significant players in areas of operation which are key to success in their respective market”. As a part the AI technology that helps us value companies, we also found a method to measure the opportunity that a company will have should it execute successfully. We created an “opportunity index” that includes the potential market size and addressable market audience, the competitive situation, and how they all translate to ROI potential. In order to measure it we use the Google Trends of the sector to validate growth, general sentiment analysis towards the sector, and competition or a lack of competition within a sector.
9. Calculate Valuation: The culmination of the valuation process is to produce a single digit that represents the company’s valuation. But how do you assign a value to a startup company, a number that the company is trying to hide desperately? Valuation guru, Prof. Aswath Damodaran is the most prominent voice today speaking about company valuation method. According to Damodaran, You should take into account the company's discounted cash flow, growth, and risk. This is intrinsic valuation. Only then are you allowed to use a relative valuation method that is based on other companies in the field, using standardized metrics and multiples. That’s why Damodaran adds to the table principles taken from pricing theory. According to him, pricing is estimated by how much people are ready to pay for similar businesses and this is measured by multiples and comparables that represent parameters, such as market mood and momentum. For instance, recent acquisitions in the automotive technology market standardized pricing of companies to $10 million per employee. The VC world often calculates valuation by looking at recent pricing of the same company in the previous financial round, or another company by another VC, or pricing of similar private companies along with the pricing of public companies. But sometimes, Damodaran says, VCs attach too much importance to pricing and relative valuation. Besides, unlike the oil or telecom companies, startups don’t have enough to sample for comparison. In other words, there are not an abundance of ride-hailing apps that you can compare a new ride-hailing startup to. Most of them aren’t traded. They are private companies that change their valuations infrequently, plus the cap table is distributed between investors with several different preferred stocks, each with a completely different way to calculate the valuation to date.
But what happens when you don't have the intrinsic data on the company? This is commonly the case. Entrepreneurs are not going to start disclosing revenue data or their discounted cash flow in the next few years.
Usually a startup in its first year doesn't make any revenue and it invests most of its capital in future growth. This could mean hiring new engineers, building new products, or growing their marketing team. The cash flow, then, is an imaginary number predicted by the management and it stays that way until the company is significantly growing. But there is nothing wrong with that, says Damodaran. The investors expect the company to lose money - even in areas that hadn't been thought of. That's why, according to Damodaran, in the new digital economy companies are usually valued by the number of users.
In the startup economy growth in users, engagement, or momentum might say a lot more about the company than its current cash flow. But it might also have some implications for the future of company's revenue.
We at Zirra took the challenge to break the taboo and speak of how much a private company is worth. We did that because we cherish the same factors cherished by investors: growth, product adoption, engagement, momentum, brand power, funding, and a healthy team. We also feel we can do that because we take into account external risks like fierce competition, a non-existing or too-early market, a lack of funding, or an inexperienced team.
We assume that we don't know everything, but we have built a good-enough model that helps us manage both intrinsic and relative valuations based on public data. By doing so we try to challenge the valuation of the company as it appears in the financial books. While exact valuation is tricky, we try to make it as close as possible, often challenging the valuation the company has given itself.
Is the valuation of the company written that exists in financial books locked deep inside an accountant's safe the real valuation? Not necessarily. A few factors, such as preferred stocks and a hot investment market, can inflate the company's valuation in an artificial way. And that's exactly what made us develop our own algorithms - we'd like to put a solid mirror in front of those numbers and to pull away from the bubble effect.
Zirra values Spotify at $7.6B-$7.7B
Zirra values Snapchat at $17
Zirra's Estimation Process
Zirra has developed AI and machine learning technology to effectively analyze the private tech market. It provides insights on startup companies, including estimated valuations, competitor lists, estimated time to exit, risk and success factors, as well as ratings of the team, product, momentum, and execution. Based on its technology, Zirra serves investors and entrepreneurs, ith spotlight reports that help them learn more about the companies they are engaging or competing with. Executive Job-seekers can also get a full report focused more on HR aspects.
The Zirra valuation process involves both intrinsic and relative valuation algorithms. The intrinsic data includes revenue and expense estimations, traffic trajectories, investment history, and velocity, based on aggregated sources.
In the relative analysis, data is compared and benchmarked with a database of 1,200 companies looking for correlation with regards to stage, space, size, and trajectory. This produces a preliminary set of company ratings and valuation metrics. For example, the algorithm concluded that teams of up to 3 co-founders, each specializing in his/her field of business, technology or marketing leads to growth, whereas teams of 4 or more co-founders carry a higher degree of risk. The machine learning algorithms track the growth of companies, arrive at conclusions independently, and dynamically adapt for future analysis.
We then produce a map of competitors based on the data set, rated in accordance with the degree of direct competition, its size, threat, and proximity of the shared customer and partner base. Results are sent to relevant experts in our expert community, which is already over 450 experts strong. Experts comment on both quantitative analytics (scores and metrics) and qualitative analytics (risks, opportunities, competitors). And that brings us to our 10th step.
10. Reassess your research: Go back to to your expert and validate your research with him, make sure that you didn’t miss anything or have the company over or under valued.